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Active Investing and Execution

Harsh Agrawal

Harsh Agarwal
Head ‐ Alternative Strategies

Active Investing and Execution

Why do investors put their hard‐earned money in the stock markets? To make good returns over a period.

There has been debate over active and passive investing for a long period of me. Let us understand what active investing is about. Active investing has three broad components

Active stocks selection: deviating from benchmark index either in stock constituent or their weightage. Fund management is all about the right stock/sector selection given the macro environment or business cycles. Correct reading of economic and business cycles can significantly improve returns. Loosing stocks in the portfolio will be fewer and winner will be more. Over long period of me, good stock selection can be significant source of alpha generation.

Active asset allocation: Oen macro environment can be challenging. Broader business growth and earnings deteriorate, and stocks decline. A smart portfolio manager can minimize the drawdown by actively (and hopefully timely) moving the allocation from Equities to lower risk interest-bearing debt or lower volatility Gold ETFs. We have such a design within the mutual fund structure. The category goes by the name Balanced advantage fund. However, not all portfolio managers change the allocations. Many keep the equity: debt allocation constant thereby defeating the purpose of the fund. Do note, that ming the equity market is difficult.

However, it pays to be cautious when markets are ignoring the economic/business risks. A well‐timed equity: debt allocation not only improves the overall returns but also the investor experience. Investors gathers more comfort to allocate his investments in the find for, longer as he sees lower volatility. It is often argued that fixed allocation (rather than interpreting the business cycles and therefore dynamic allocation) is winning strategy.

My personal observation is that when the forecasted growth path (and therefore equity returns) is long and strong, then there is not much need (or benefit from) dynamic allocation. But, when the returns slope is weak (i.e. forecasted growth and returns are tepid) and macro/business uncertainty is higher, a dynamic allocation scheme with a good portfolio manager behind it can be the single largest source of excess return (minimization of drawdown).

Active Long‐Short portfolio: This is less appreciated but comes in very handy. Take last 5 years. NIFTY touched ~9000 mark in early 2015. Aer 5 years, it is still at the same level. Significantly larger number of stocks have gone down, while few stocks have gone up. Active shorting of stocks/weak businesses would have significantly added to long portfolio returns. Such a strategy can be executed through cat III long‐Short AIFs in India.

As we move to higher levels of active investing, i.e. Active Stocks Selecon to Dynamic Asset Allocation and then to Active Long‐Short portfolio, the level of required diligence, reading and skill becomes more demanding and hence increases the chances of errors. However, a well‐executed active investing strategy has no replacement.

Lot of investors’ effort goes into monitoring the economy and markets to decide his risk and non‐risk allocations. In an ideal world this effort needs to put in by the portfolio managers with requisite tools (fund structure) to allow them to do active investing.

About Harsh Agarwal

Harsh Agarwal has an overall experience of more than 16 years in both Portfolio Management as well as research. Harsh joined Tata Asset Management in November 2018 as Head of Alternative Strategies.

Prior to joining Tata Asset Management, Harsh was working as Portfolio Manager ‐ Equity long/short strategy at Reliance Securities where he managed equity long/short book.

Harsh started his career with family business and subsequently moved on to providing Equity Research and Advisory to Equitech, a long/short equities proprietary trading desk of Deutsche Bank, and Roc Capital Management, LLP (one of the largest hedge fund launch for 2009) during his tenure with Vistasoft India as a Principal Research Analyst.

Harsh is an MBA (Finance) from Symbiosis, Pune. He has also done courses in Certified Portfolio Manager and Certified Treasury Manager from The Institute of Chartered Financial Analysts of India University.

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